The aging 401(k) retirement plan is getting a makeover this year – an option that provides for tax-free withdrawals in retirement.
The newly minted Roth 401(k) operates like a Roth IRA in that contributions are made with after-tax dollars. Disbursements, including all capital gains, come out tax-free.
The Roth 401(k) maintains the underlying features of the traditional 401(k), including employer matches when offered and the same menu of investment choices.
Congress authorized the new retirement vehicle in 2001 and set a 2011 expiration date. The Internal Revenue Service didn’t set guidelines until late last year.
Plan providers, such as Fidelity, are rolling out the new bells and whistles. But the verdict is out on whether employers will implement the plans.
Brian Chase, president of Fay CPA in Denver, plans to offer a Roth 401(k) option within his accounting firm of 10 as soon as he can.
“Particularly for younger people, for young professionals, it will be popular,” Chase predicted.
Becky Benson, a project manager at a technology firm, can’t take advantage of the Roth IRA because she and her husband make more than the $150,000 income ceiling the government sets.
She plans to lobby to get the Roth 401(k) option added as a substitute.
“My next step is to start asking my employer when they will make that available,” she said. “To be able to maintain my lifestyle after retirement, you try and take every vehicle possible.”
Benson’s financial planner, Pam Dumonceau with Consistent Values in Aurora, argues the Roth 401(k) makes sense over the traditional 401(k) for most workers.
To illustrate the point with clients, she asks them if they would rather pay taxes on a small pile of money or a big one. Most answer the small one.
“I explain the small pile is their contribution, the big pile is the distribution,” she said. “Paying tax on the small pile is the Roth.”
While the plan is seen as a plus for most workers, employers may not prove as enthusiastic.
“Frankly, from the employer side, it will be a real pain … because of all the additional record-keeping requirements,” said Jim Vonachen, a senior tax partner with Clifton Gunderson in Denver.
Assets in the traditional retirement plan must be tracked separately from those in a Roth. Also, the Roth’s short window of availability makes it a tougher sell.
For plans that already offer a feature to accept after-tax retirement contributions, providing a Roth 401(k) shouldn’t be difficult, said Mark Gutrich, president and chief executive of Fast 401(k) Inc. in Denver.
Where the work gets heavy is in educating workers on which option, traditional or Roth, works best, he said. The calculation depends on how long a worker has until retirement, how aggressively they invest, and their tax bracket now and in retirement.
“For the right demographic, it (the Roth) is beneficial,” Gutrich said. He sees the Roth 401(k) being popular with professionals and managers making $70,000 or more a year. Vona- chen sees the Roth 401(k) as offering an advantage for those with 10 or more years until retirement and for small firms.
For workers who can afford to keep steady the amount they contribute to their retirement plan, which requires paying more in taxes, the Roth 401(k)is a sure bet.
The decision gets trickier if workers want to contribute less into a plan and keep their take-home pay the same, according to a Roth calculator available at www.401kHelpCenter.com.
A 25-year-old single worker making $30,000 a year who contributes 10 percent of her pay and earns 8 percent a year would have $674,552 at age 65 under a Roth. Assuming she retires in a 25 percent tax bracket, her traditional 401(k) plan would provide $629,507.
But a 55-year-old worker paid $90,000 a year and retiring at 65 who opened a Roth would accumulate $99,099 by retirement using a Roth, less than the $105,607 available after taxes in a traditional 401(k).
That’s because the Roth works best when a worker has a long period to let contributions accumulate capital gains. The more gains that can build up, the more money that escapes taxation.
Gutrich said that 1 percent of the 1,400 401(k) plans his company services have expressed an interest in the Roth 401(k). He estimates that no more than 3 percent will implement it.
Human-resources consultant Hewitt & Associates found that of 200 firms it surveyed, slightly more than a third were considering a Roth 401(k).
“It is a highly individualized benefit. It is not a broad-based solution,” Gutrich said.
Staff writer Aldo Svaldi can be reached at 303-820-1410 or asvaldi@denverpost.com.
